Sunday, October 06, 2013

Media research analyst at Exane BNP Paribas Sami Kassab on the state of Open Access: Where are we, what still needs to be done?

Sami Kassab

Sami Kassab is an Executive Director at the
investment company Exane BNP Paribas, where he runs
the Media Research team covering professional publishing. Amongst the companies Kassab
monitors are Reed Elsevier, Thomson Reuters, Informa, John Wiley, Wolters Kluwer, and Pearson. Currently, Kassab is positive about
the sector, arguing that scientific publishing offers “best in class defensive
growth in a very resilient industry”. Kassab believes that Open Access (OA) is still a marginal activity and in any case poses neither
a short-term nor a long-term threat to large scholarly publishers. In fact, he
says, it will enable them to monetise more articles than they have been able to monetise historically.

Kassab’s views
will undoubtedly challenge OA advocates, who have long maintained that Open Access
will mean that publishers will play a much smaller role in disseminating research in
the future. This, they add, will force them to downsize, and so reduce the financial burden on the research community. Indeed, it was in the
expectation that OA will lower the costs of scholarly communication that many
people joined the OA movement in the first place — especially librarians, who
have long sought relief from the so-called serials
crisis (Whereby the
cost of serials has consistently outstripped libraries’ ability to pay for all
the journals they need).

Concomitantly,
OA advocates argued that Open Access will inevitably reduce the profits of
scholarly publishers, a belief that gained credence from the way in which publishers have persistently lobbied against OA over the past decade or so.

Until a few
years ago Sami Kassab and his colleagues at BNP Paribas viewed OA as a
threat to publishers too. In 2003, for instance, the website newratings.comreported
that BNP Paribas had downgraded Reed Elsevier to “underperform” — on the
grounds that the investment firm had concerns “regarding the company's current
subscription based access, as compared to the newer and more successful
article-fee based open access system.”

But this is no
longer the view of Exane BNP Paribas, or of Kassab. Today the investment company is upbeat
about the future of large scholarly publishers like Elsevier.

Marginal

Kassab has
turned positive on scholarly publishing for two reasons.

First, he
points out, OA remains a marginal activity. As he explains below, “Since 2002,
OA has made some good progress but still has a long way to go to become the
dominant scholarly communication model, if ever.”

He adds, “Despite
the noise around OA, consortia are still signing long term subscriptions
contracts with limited cancellation clauses.”

Moreover, based
on what Elsevier’s customers say, Kassab believes that this is likely to remain
the case for the foreseeable future. “Our proprietary survey of directors of
library consortia shows that a vast majority does not expect to reduce spending
with Elsevier because of OA in the next five years.”

In any case, says
Kassab, there is no discernible future threat from OA either. While anticipating that the author-pays OA model will lead
to a decline in per-article prices, Kassab expects this to be compensated for
by a rise in the number of papers published.

He explains, “In
a Gold OA environment, the model becomes more of an administrative service (managing
the peer review, formatting and archiving the content). Such an administrative
service is likely to attract more competition and hence result in lower price
points.”

He adds, “We
estimate Elsevier generates over $4,000 of revenues per article published. Our calculation
of the average APC charged by publishers is around $2,000.”

While this is a significant fall, Kassab believes that publishers can take it in
their stride, or at least large publishers can. “[A]s the whole industry
switches to Gold OA, we believe that publishers’ rejection rates are likely to
come down. In other words, for the large publishers, we expect an increase in
published output to compensate for lower price points.”

More
specifically, in a recent report Kassab and his colleagues estimated that
Elsevier currently rejects 700,000 out of 1 million articles each year. With
Gold OA, they argue, “these articles are likely to be monetised.”

OA advocates would
doubtless point out that while these 700,000 papers may be rejected by the
first journal to which they are submitted, the overwhelming majority of them nevertheless
go on to be published elsewhere — since most if not all papers are eventually
published. As such, they would say, these papers are already being monetised
under the subscription model.

If this is right,
it would seem to suggest that OA will reduce publisher revenues, particularly
if the price per article is expected to fall from $4,000 to $2,000.

However, Kassab’s
assumption is that big publishers like Elsevier and Springer are inevitably the
first choice for researchers wanting to publish a paper. As such, in a Gold OA
environment the lower price-per-article would be compensated for by the fact that these publishers would start publishing papers that historically they would have rejected (papers that today would presumably be published by journals further down the journal
hierarchy).

If Kassab's analysis is correct, then presumably this is good news for large publishers, but bad news for smaller publishers, who could presumably expect to lose market share to their larger rivals.

Noteworthy

Economics aside,
what did I find particularly noteworthy about Kassab’s answers below?

First, I was
surprised at his suggestion that the image of publishers has improved rather
than (as is widely argued by OA advocates) deteriorated in recent years. In
support of this claim Kassab cites the fact that where 34,000 researchers
signed the PLOS 2001 petition calling for OA, and six years later (in 2007), 30,000
signed the JISC
petition calling on
the EC to make publicly-funded research freely available, in 2012 less than 14,000
committed to boycott Elsevier on the Cost of
Knowledge website.

While
conceding that these polls relate to different populations (e.g. Cost of Knowledge
was mainly mathematicians) and were about slightly separate issues, Kassab
says, “At the risk of playing the devil’s advocate, one could say that the
image of publishers, especially the largest ones, has actually improved. This
view would be consistent with the fact that journal price inflation has come
down, that large publishers have invested in new products and technological
features (search, visualisation tools, mash-ups, database linking, apps, etc.)
and have improved their customer relationship management.”

Second, I was
intrigued when — in suggesting that Green OA will eventually force publishers
to embrace Gold OA — Kassab argued that Gold OA is in fact a return to the
past. As he puts it, “Our working assumption is that the growth in Green OA
will ultimately force the scholarly publishing system to revert to the dominant
model of the 50s and 60s, i.e. article processing charges, or as we call it
today Gold OA.”

When I emailed Kassab
to ask why he thought Gold OA was a return to the 50s and 60s he replied, “I
understand that the dominant model back then was page charges. Later in the 60s
or 70s commercial publishers adopted a strategy where, in essence, they stopped
(or reduced) page charges in order to attract authors and content. They also
increased subscriptions prices (‘exploiting’ the captive nature of librarians)
to offset that reduction in revenues. Over the years, they proved successful
with that market approach so that subscriptions became the dominant model as it
still is today.”

Third, I was
struck that in making the case that OA is only of marginal interest, Kassab cited
a 2010 survey
of researchers that had concluded that access to research papers is unproblematic (Access vs. Importance). Until it
withdrew support for the controversial Research
Works Act, Elsevier frequently cited this survey too. In doing so, however, it often did
not indicate that it had undertaken the survey itself (via the intermediary
organisation the Publishing Research Consortium). Examples of such citations can be found here
and here.

The 2010 survey is a controversial one, not least because of its claim that
93% of researchers surveyed reported that they were satisfied with access to
research information in journal articles. Even more strikingly, it reported that
78% of respondents in Africa find it very or fairly easy to access all the
journal content that they need. When they are presented with these findings,
researchers tend to greet them with a mixture of anger and scepticism — see this conversation last year for instance.

Embargoes

Fourth, in
answering a question about the recent recommendation
by the UK Business, Innovation & Skills Select Committee that RCUK’s
Green OA embargoes should be
reduced in length, Kassab provided a graph (see below) showing the article half-life for a
number of different disciplines. He then explained, “If the embargo period were to
be reduced to 6 months in STEM and 12 months in HASS, the percentage of
publishers’ usage covered by the window of exclusivity would be reduced from
50% to around 30%. If that length of embargo were to become the global norm, publishers’
selling proposition would in theory be weakened.

He added
however, “Yet, it is unclear to me whether subscriptions (and profits) would
suffer. For one, a subscription covers the needs of researchers whose downloads
are outside the embargo periods as well as those researchers downloading during
the embargo period. As subscriptions are not based on the timing of downloads,
cancellations would hurt scientists with an urgent need to get access to content.”

In addition,
he said, “the UK accounts for c. 6% of global article output and it is
questionable whether and how quick other countries, research-funding and
research-performing institutions would follow suit.”

In other words, presumably, Kassab is doubtful as to whether the shorter Green embargoes recommended by the BIS Committee would lead to journal cancellations.

We
could note that publishers predict a somewhat more
dramatic impact. Last year, for
instance, The Association of Learned, Professional and Society Publishers (ALPSP), along with the Publishers Association, reported the findings of a survey that, they argued, demonstrated that a six-month embargo would cause libraries
to cancel 65% of HASS and 44% of STM journal subscriptions. (Although again the
survey was somewhat controversial).

Finally, I
would note that Kassab’s predictions about scholarly publishing and OA would appear to assume
that the current journal-based scholarly publishing system — along with
pre-publication peer review and obeisance to the Impact
Factor — will
continue into the future. This is not the view of many OA advocates, especially
second-generation advocates like Björn Brembs
— who see a very different kind of publishing landscape emerging.

But then
Kassab’s timeframe is what analysts call a terminal world. As such, their star
gazing generally extends no further than ten or twenty years at most, as Kassab
notes below. That, of course, is the maximum timeframe that concerns investors.

~~~

The Q&A Begins

Q: Earlier in this Q&A series publishing
consultant Joe Esposito suggested that Open
Access will never be more than a niche activity. As he put it, OA will be “a
useful, marginal activity that opens up a new class of customers through the
author-pays model … OA is marginal in the sense that most research is performed
at a small number of institutions. ‘Most’ is not the same thing as ‘all.’ Those
institutions subscribe to most (not all) of the relevant materials. So by
definition the access granted by OA is marginal to what researchers at the
major institutions already have. Nothing wrong with working on the margins, but
let’s call it what it is.” Is this a view you share? If not, what are your
expectations for OA?

A: For the big
four STM publishers — Elsevier, Wiley, Springer and Informa’s Taylor &
Francis — we estimate that OA revenues account for 1% to 10% of STM journal
revenues with an average of around 3%.

OA is indeed a marginal activity when
it comes to pulishers’ revenues mix. Subscriptions still dominate. We note
however that many of them have stepped up investments in that field in recent
years (Informa, Wolters Kluwer, Wiley). Amongst large STM publishers, Springer
still is the most exposed to that model.

Q: There has always been a great deal of
discussion (and disagreement) about Green and Gold OA. In light of recent
developments (e.g. the OSTP
Memorandum, the RCUK OA policy, the European
Research Council Guidelines on
OA and the new OA policy at the
University of California) what roles do you expect Green and Gold OA to play
going forward?

A: Through our
contact with leading OA publishers, we estimate that the pot of money available
for funding Gold OA APC is currently growing at 20% p.a. Our tracking of the
growth in the number of OA mandates (institutional and funders) registered on
ROARMAP shows a similar growth rate (30% in H1 2013 after c.20% in 2012).

Consequently, we believe that both
Green OA and Gold OA are likely to continue to grow in the foreseeable future.

In a Green OA environment, publishers’
embargo policies or no self-archiving policies imply that authors — and readers
— do not always enjoy the immediate benefits of publishers editing and
formatting. Green OA therefore serves primarily the purpose of funders and
institutions as they can increase their return on investment through that
model. Funders and performing-institutions benefit from the increased
scientific impact without paying to publish, other than their subscriptions.

As the PEER project has shown, readers prefer
using the publishers’ fully formatted version of record rather than the
stage-two manuscript of Green OA mandates. Hence our view that Green OA
principally fits the purpose of funders while Gold OA principally serves the
scientists. A point which is further underpinned by the low compliance ratios
and even lower levels of un-mandated self-archiving.

Q: What about Hybrid OA, which most of
those in this Q&A series have expressed some concern about? What role do
you expect to see that play going forward?

A: As long as
publishers commit to their ‘no-double dipping’ policies hybrid OA journals are
just one more alternative.

Hybrid OA journals enable gold OA
authors to have the immediate benefit from the prestige an established journal
has acquired over time. At the same time, unlike pure Gold OA journals, they remain
available for authors who do not have the funds to pay APCs and prefer to
publish in the traditional format.

The system however needs to put in
place ways to control that subscription prices reflect the non-OA content of
such journals.

Q: How would you characterise the
current state of OA, both locally and internationally?

A: Since 2002,
OA has made some good progress but still has a long way to go to become the
dominant scholarly communication model, if ever.

The European
Research Council Guidelines on OA were an important albeit symbolic
milestone. We estimate that the European Research Council funds less than 3% of
the global volume of articles published every year.

The White
House order
is a more meaningful step as around 50% of the $75bn the US spend on basic
research every year stems from federal funds. But with less than 20% of global
research output in an OA format, there is still a long way to go.

Q: What in your view is the single
most important task that the OA movement should focus on today?

A: I think it
should focus on providing more substantiated evidence on how society,
institutions and most of all authors would benefit from transitioning the
scholarly communication model from subscription to OA.

Victor Hugo argued that nothing is
more powerful than an idea whose time has come. And yet, OA has been around for
more than a decade and still lacks any meaningful critical mass. Researchers
are reluctant to do the few extra keystrokes that are required for Green OA.
High compliance ratio to green OA mandates are not universal. Perhaps, authors
are unconvinced by the fundamental merit of the OA model.

The same goes for institutions.
Elsevier has over 4,000 institutional clients around the globe. Less than 300
institutions have signed OA mandates worldwide. In contrast, MOOCs have taken
the higher education world by storm with hundreds of institutions experimenting
with MOOCs within a few months.

Q: Do you think that OA inevitably leads to
conflict and disagreement between publishers and the research community?
Certainly in the wake of the failed attempt to get the Research Works
Act passed in the US there appears to be growing
disenchantment amongst researchers with commercial publishers. Indeed, in the
first Q&A in this series, palaeontologist Mike Taylor says that legacy
publishers “are not our partners, they're our exploiters”. Is it that
researchers, librarians and research funders expect more of publishers than
they can reasonably deliver? Is it that the profits of scholarly publishers
are, as critics argue, excessively high? Or is there some other reason for this
disenchantment?

A: In the
context of the last 10 or 20 years, we do not believe that ‘there is growing
disenchantment amongst researchers with commercial publishers’.

Although these are separate
populations, polled on separate issues, we still believe that the numbers tell
us something.

At the risk of playing the devil’s
advocate, one could say that the image of publishers, especially the largest
ones, has actually improved. This view would be consistent with the fact that
journal price inflation has come down, that large publishers have invested in
new products and technological features (search, visualisation tools, mash-ups,
database linking, apps, etc.) and have improved their customer relationship
management.

STM publishers are a pivotal part of
the scholarly communication system and yield power. When this power leads to
unsustainable price increases (like in the 90s and during the serials crisis),
the backlash is inevitable.

On the other hand when price inflation
is in line with content and value growth and when cost efficiency gains
(through offshoring and technology) are reinvested to drive innovation, an
equilibrium between high profit margins and customer satisfaction can be
reached.

Q: You will perhaps know that Sanford
Bernstein analyst Claudio Aspesi believes (see also here and here) that OA
poses a significant threat to publishers, especially Elsevier. Do you agree?
How would you characterise the attitude to OA amongst most financial investors,
and the shareholders of STM publishers?

A: We had a similar view between 2002
and 2009 and then changed our opinion. Our proprietary survey of directors of
library consortia shows that a vast majority does not expect to reduce spending
with Elsevier because of OA in the next five years.

We are far from any critical mass that
could lead to subscription cancellations. Despite the noise around OA,
consortia are still signing long term subscriptions contracts with limited
cancellation clauses. At the Frankfurt Book Fair last year, we heard of an
Eastern European consortium signing a 7-year deal with a major publisher, more
than the usual 3 to 5-year deals.

When it comes to valuing publishers’
shares, we have to make an assumption about a so-called terminal world (i.e.
how we see the world in 10 or 20 years). Our working assumption is that the
growth in Green OA will ultimately force the scholarly publishing system to
revert to the dominant model of the 50s and 60s, i.e. article processing
charges, or as we call it today Gold OA.

We believe this is likely to drive
down the average revenue per article published for journal publishers. However,
as the whole industry switches to Gold OA, we believe that large publishers’
rejection rates are likely to come down. In other words, for large publishers
such as Elsevier and Springer, we expect an increase in published output to
compensate for lower price points. Overall, as things stand, we do not agree
that OA poses a significant threat to publishers, in particular not to their
share price developments.

Since the Budapest Declaration of Open
Access in 2002, Reed Elsevier share price has never been as high as now (853p
on August 1st, 2013). This share price level has been reached
despite the achievement of a major milestone in the OA movement, the White
House executive order on Open Access in February 2013. Financial investors and
shareholders of STM publishers currently do not discount OA as a major or
imminent threat to STM publishers.

Q: The seeds of the OA movement
(certainly for librarians) lie in the so-called “serials crisis”, which is an
affordability problem. It was this affordability problem that created the
accessibility problem that OA was intended to solve. Yet Esposito believes that
OA will be “additive, not substitutive”, suggesting that OA will see the costs
of disseminating research increase rather than decrease. OA advocates, meanwhile,
argue that OA will be less expensive than subscription publishing. What are
your views on the question of costs? Does cost really matter anyway?

A: A few years
ago, Phil Davis at Cornell produced empirical evidence suggesting
that under Gold OA the most productive universities would have to pay more in
APC than in subscriptions, while the less productive ones would pay less. As
publication primarily benefits the author and its institutions (rather than the
reader), this change seems acceptable.

We do believe that the cost of
publishing research is likely to come down in an OA world. The price points in
a subscription model reflect the economics of the model. On the supply side,
journals are monopolistic in nature as articles only get published once. On the
demand side, users are not the payers. Librarians are caught between a rock
(publishers’ price demand) and a hard place (patron’s subscription request). A
captive demand and a monopolistic supply most likely lead to high price points.

In a Gold OA environment, the model
becomes more of an administrative service (managing the peer review, formatting
and archiving the content). Such an administrative service is likely to attract
more competition and hence result in lower price points.

Q: What are your expectations for OA
over the next 12 months?

A: We expect
more green OA mandates worldwide and further increase in Gold APC payments, but
we do not expect OA to reach a tipping point nor trends to differ materially
from what they have been historically.

We also believe that established STM
publishers are likely to launch more Gold OA journals. Publishers increasingly
consider the long term risks to their businesses as low but see the opportunity
to grow their profits in the short term.

Q: Since I emailed my list of questions to you
there has been a new development in the OA world, with the publication of the UK
House of Commons BIS Committee inquiry into OA. In its report, the BIS
Committee calls on the UK government to do a U-turn on its OA policy, and
prioritise Green OA rather than Gold (as currently), while at the same time
placing an upper limit on embargoes of 6 months for STEM subjects and 12 months
for HASS subjects. (Currently 12 months and 24 months). It also recommends that
the Government require immediate deposit in repositories (if not immediate OA).
In addition, the report says that if the current preference for Gold OA is
maintained, “the Government and RCUK should amend their policies so that APCs
are only paid to publishers of pure Gold rather than hybrid journals to
eliminate the risk of double-dipping”. We do not know whether the UK Government
will accept these recommendations, but if it did what impact (if any) would you
envisage it having on scholarly publishers, on their profits, and on the
development of Open Access?

A: The chart
below shows the article download curves from Elsevier's ScienceDirect. Given the size of this
publisher, we believe it is representative of the whole market. It shows that
the half-life in fast moving sciences (life sciences, health sciences) is
around 12 months while it is between 24 and 36 months for slower moving sciences
like Mathematics or Social Sciences.

In other words, in life sciences
around 50% of all downloads of a given article happen in the first 12 months of
publication. Publishers’ embargo policies are based on the half-life concept.
They take the view that a window of exclusivity covering 50% of their usage
should be sufficient to protect subscriptions and profits.

Article half-life curve

If the embargo period were to be
reduced to 6 months in STEM and 12 months in HASS, the percentage of
publishers’ usage covered by the window of exclusivity would be reduced from
50% to around 30%. If that length of embargo were to become the global norm,
publishers' selling proposition would in theory be weakened.

Yet, it is unclear to me whether
subscriptions (and profits) would suffer. For one, a subscription covers the
needs of researchers whose downloads are outside the embargo periods as well as
those researchers downloading during the embargo period. As subscriptions are
not based on the timing of downloads, cancellations would hurt scientists with
an urgent need to get access to content.

In addition, the UK accounts for c. 6%
of global article output and it is questionable whether and how quick other
countries, research-funding and research-performing institutions would follow
suit. However, we believe this proposition is likely to face some push back
from publishers.

~~

Sami Kassab is Executive Director
at Exane BNP Paribas where he runs the Media Research team. Sami has been
covering the professional publishing industry for over 10 including Reed
Elsevier, Thomson Reuters, Informa, John Wiley, Wolters Kluwer, Pearson and
several other publicly-listed publishers.

As an equity analyst, Kassab’s
clients include global investment firms who look to buy or sell the shares of
listed publishers. Sami has had sell recommendations on Reed Elsevier for most
of the 2002 to 2009 period and currently has a Buy rating on the stock.

5 comments:

Compliments for an excellent overview. This is recommended reading.At the APE 2013 conference we had vivacious discussions about the sustainablity of public OA funding. In January 2014 our main discussion theme is 'redefining the scientific record'. The quality of OA publishing is of growing concern.Best wishesArnoud de KempOrganiser of the APE Conferences on Open Access and the role of information in science and societywww.ape2014.eu

Senior Research Analyst for European Media at Sanford Bernstein, Claudio Aspesi, forwarded the response below to the above Q&A:

I do not like to comment on other research. Since Sami feels free to comment on my research, however, I will make a few points.

In general, I would observe that:

1) Some statements are uncontroversial (OA is still a marginal activity today).

2) Some are reasonable expectations about the future (if you go back and look at the documents I sent you at the time of publication — and attached again here and here — we also simulated the possible expansion of the volumes published by Elsevier).

Similarly, it is reasonable to assume that most librarians — if asked today — do not expect OA to materially change the amount of money they spend on STM subscriptions.

3) Some would perhaps require more thinking: if revenues per article decline by 50%, just raising the number of articles published may not lead to an equal outcome for publishers.

It is true that Elsevier has some fixed costs which are not linked to the volume of articles published, but the vast majority of its journal costs are driven by the volume of articles published.

Our calculations show that – in the current model – Elsevier earns about £3,000/article. So, even if Elsevier could earn APCs which are 50% of the revenues per article earned in the current subscription model (and earning APCs of £1,500 across all articles on all journals could prove challenging), and even assuming that Elsevier has a 50% profit margin per article, there would be no profits left.

We actually believe margins are lower (in the 40/45% range) and that Elsevier would be able to take some costs out (somewhere between 10 and 15% of its total costs, according to our analysis). Nonetheless, the decline in profitability would be massive, as our simulations show.

The real question is not what happens to Elsevier if Gold OA becomes the norm, but whether it happens.

Hybrid OA would be an attractive way for the publishers to limit the impact of OA mandates, but it is virtually impossible to prove – over time – that APC funding is being “handed back” to subscribers. Hence, a growing number of funding bodies is indicating that Hybrid OA will not fulfil their mandates.

This is really bad news for the publishers, because – if over time Hybrid is “disqualified” - they need to then embark on one of three strategies:

1) Fight back on OA overall – but this goes against political trends everywhere

2) Support Green (with all the attending risks that Sami points to in relation to embargo periods) or

I think that opinions and analysis in the post and Q&A featuring the views of Sami Kassad leaded by specific interests and not recognizing the core OA issues.1. Investment companies are heavily interested in safe short and long term revenues - it is totally clear that in such an environment the still dominating paywall model for scientific publishing is overestimated: The OA model as stated will lead to less profits and less capital turnaround - at least how it works today. This can´t be in the interest of an investment company.2. The development of scientific publishing through refereed journals has a long history and even the transformation of the historical publisher as an individual into a stock quoted global business has taken 30-40 years. So even in a quicker paced world it may take 10-20 years until OA is the "dominating" mainstream. Additionally we do not know what impact social and mobile web developments will have on scholarly communication in the comming years.4.The fact that "consortia are still signing long term subscriptions contracts with limited cancellation clauses" are imho not caused by enthusiasm for this type of business model, but by the many forces and stakeholders every consortium is exposed and involved.5.Important issues driving OA are mentioned:a. The current state/public funding of science fueling stock based global capital markets and publishers collide with public state and science interests securing investments for public and scientists access to science.b. The growing prices of scholarly journals are not the only burden: The editorial and referee processes today are an equal stress pushed by publishers to scientists. There is a growing frustration of scientists about the whole scientific publishing process seeking quick and unhampered scientific communication.